Life Insurers Ceding More And More Mortality Risk

Fitch believes the primary risk for life reinsurers is potential inadequacy of pricing. Much of the downward trend in reinsurance rates is predicated on assumptions of continued improvements in mortality. If these improvements do not materialize, then reinsurers will have to increase reserves in the future.

A potential competitive challenge to life reinsurers is securitization, which involves taking the cash flow from a block of assets and liabilities, and converting it to a security that is sold in the capital markets. To date, there have been few life insurance-related securitizations completed. Fitch believes this is not a material threat to life reinsurers in the near-term.

The life reinsurance business has undergone significant consolidation in recent years. In just the past six years, nine of the top 18 reinsurers were acquired. Swiss Re was most active, acquiring four reinsurers including Lincoln Re, Mercantile & General, CIGNA Re and Life Re. Now, Swiss Re represents approximately 30% of the U.S. life reinsurance market. The top five life reinsurers represented 68% of 2000 life reinsurance assumed on a pro forma basis.

The benefits of consolidation for life reinsurers can include expense efficiencies, broadened mortality profile, product diversification, expanded distribution and additional management talent. Several reinsurers, such as TransAmerica and RGA, changed ownership as part of a larger transaction and not specifically a reinsurance-only consolidation.

Several startup companies have entered the U.S. life reinsurance market over the past several years. These companies have been offshore entrants that have used their tax advantage in some niche markets. To date, results for these startups have been mixed.

Fitch expects some continued consolidation over the next several years. Likely acquisition candidates are those reinsurers that are not considered a core operation of their owner. Likely acquirers include existing life reinsurers that want to grow scale, non-life reinsurers that want to diversify into the life business and foreign reinsurers that want to grow their U.S. presence.

Rating implications for life reinsurance acquisitions are dependent on the purchase price, acquisition financing, managements track record, financial strength of the companies involved and integration plans. Given that research shows the majority of acquisitions do not meet managements expectations, Fitch will be somewhat skeptical of financial projections when assessing transactions.

Julie Burke, CPA, CFA, is a managing director with Fitch Ratings in Chicago.

Reproduced from National Underwriter Life & Health/Financial Services Edition, April 1, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.